What is the best way to adjust out inventory for goods used internally in the business? How about donations?

If you have been adjusting out the quantity for items you use internally in your business, this is called tax evasion. ;-) If you are audited by your state's sales and revenue department, you will find this out the hard way.

The proper way to account for goods purchased by your store for internal use is to setup a house charge account.
Example: Setup a customer account with a Company Name of Shop Expense or First Name=Shop Last Name=Expense.
Enable account status on the Account tab in Customer Properties and set a credit limit (ex. $1000).
Products removed from the floor for internal use should be charged to this account. You should do this at cost + 0 using Shift-F3 Discount in POS. That reflects the amount you paid for the products from your vendor. These purchases are taxable.

Internal use can range from consumable service supplies to products used for permanent displays to donations.

Once a month write a check to pay off this account. This will properly expense those purchases through your accounting system and pay any sales dues due.

Why is adjusting the quantities for these items considered tax evasion? Because sales and use taxes are due on anything you purchase for your business. In most states this also applies to goods you purchase mailorder when no sales tax was charged. Check with your state or local tax office for details.

Donations can be dealt with in a similar fashion. You can either setup accounts for this purpose and pay for giveaways with your own business checks. Example: Donated gift certificates could be "sold" to a charity account and purchased with a check from your business.