You don't deduct the loss. The whole point of these types of retirement accounts is that you don't pay taxes on the contributions, only the withdrawals. Your tax "reduction" is that fact that, since you have less to withdraw, you pay less tax when you retire.
In fancier language, if you used tax-free money to invest in this business (probably by a rollover self-directed IRA, as suggested), then your basis is zero. If the investment is worth zero, then your loss is zero minus zero = zero. If your investment is worth $10, then you have a $10 gain, not a $199,990 loss. That gain would be taxed when and if you withdraw it from the IRA.
If you withdrew money from the 401k and paid income tax on it, then you have a basis in the business like any other regular (not tax-advantaged) investment.
