What happened to the sub and what type of entity was it? Now that you point out that it's between related parties (EXTREMELY IMPORTANT), her, her business (schedule C) and the sub(?) there is no deductible loss on her schedule C. The loan would be treated as a direct loan from her to that sub and thus becomes part of her tax basis in that entity.
To clarify a single-member LLC is a disregarded entity for tax purposes so the loan is between her and her sub(?) which is also her. Assuming the sub also went out of business and there was no cash or other assets left to repay the "loan" then the loss of that money is reflected in the loss of the sub. So a write-off on her schedule C would be double dipping. If the sub is still in existence then the loan is like the money she put in directly so she looks to that entity for the eventual repayment.
The answer I previously gave was a loan between unrelated entities.
