An LLC is deregarded for tax purposes so it was her rather than her other LLC that loaned the money to her retail LLC. What did the retail LLC do with the money? Probably used it to buy inventory or other assets or pay expenses. Thus she's getting a deduction for the loan when the items are expensed or she gets a deduction for the expenses the retail LLC paid.
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From an income/loss standpoint, which is not in conformity with the tax laws, if she were to take a write-off on the first LLC, then the retail LLC would have an equal amount of debt forgiveness income so the items would wash.
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If a bank made the loan directly to the retail LLC and she could not repay it, she would have forgiveness of debt income unless bankrupt. However, at the retail LLC level that money was used for something that would have produced expenses/loss in an equal amount so she would get the write-off from the retail LLC. In this case the write-off from the retail LLC would be canceled out by the forgiveness of debt income. again a net of ZERO.
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If you need further clarification consult an outside tax professional.
