Does the L2 application need to be reported as a denial when applying for a B1?
Yes. If she doesn't report it, the visa officer may find the application deceptive, which can result in a permanent ban from the US.
As with most cases of previous refusals, the refusal itself is no barrier to a future visa application. It's just an opportunity for the visa officer to discover additional information about the applicant.
If there is some circumstance that led to your L-1B refusal that also applies to her, then that could affect her future application. From the sound of it, that is not the case, but without knowing the whole story it's not possible to say for sure.
Also, we're expecting her B1 interview to be done around 20 Feb, and will be reapplying for a L1/L2 around 1st March. Is this behaviour that triggers a red flag for the US Embassy?
Maybe, but a red flag similarly doesn't matter by itself. What matters is the result of the visa officer's additional inquiry triggered by the red flag. As long as you and your wife have legitimate reasons for the timing of your applications, which it sounds like you do, there should be no problem.