Since Beta-reading is a sign that you are dealing with a writer who sincerely wants to improve and not end up with something reserved for the doom-spork, it is always encouraged. However, there are some matters of etiquette to hand to the jury.
1) You agree to beta-read a young fanficcer's work. She's in the 16-20 years old range. You've been writing fics longer than she's been alive. She sends you her first WiP for your mutual fandom.
The lead character's a classic case of Sue; exotic name, same pet as the author, too competent for a sixteen year old (mentions of "martial arts training" and able to diagnose injuries to another character accurately because "She saw it on the Discovery Channel"), special clothing, canon characters backgrounded...
However, the central concept is good, she knows how to use spelling and grammar checks, the research was done for the injuries and symptoms. Ditch the Sue, rewrite it around the canonical cast, and we'd have something interesting.
What is the best way to explain to the girl that, yes, you have a really awful Sue here?
2) Same situation, different fandom. Maybe a more experienced writer this time. Get the fic, open it up, and...
It's a mess. The plotline makes no sense, the prose is beige, the characterization's thin, and the dialogue goes flat. Still, she knows how to use the spell-check and paid attention in grammar classes, the basic concept is an interesting idea, she knows her canon, etc. There are signs she's done appropriate research (even if she uses it as an exposition dump), too.
She might be better off tossing most of it and doing a rewrite from the ground up; starting the plot on page 5 instead of page 25, amping up some scenes between the canon cast, refocusing it to foreground the action-adventure aspects and making the inner conflict/romance arc the "B-plot"
How do you phrase it without coming across as "Your story is complete junk?"
3) Beta reading again, yet another fandom. College-age and college-level fanfic writer, and has a few decent stories up.
It starts out great. You can hear the actors on the dialogue, the comedic timing is spot-on, the prose description and narrator voice convey the POV character and his snarky outlook on life.
But midway through, it takes a swerve in tone that makes you suspect the writer ate bad mushrooms. It relies on "random humor" and fandom in-jokes while the genuine wit and charm of the story you thought you were reading seem to have gone MIA.
How do you politely phrase "WTF?! You lost me after the teddy bear walked in from nowhere and slapped him a fish on page 8. Did you drop acid?"