My wife is a partner of a hair salon. A few years back we took out a home equity loan to fund the move to another location.  She and her partner work behind the chair and receive guaranteed payments.  We took the loan out because they were unable to get a small business loan due to the other partners credit rating.  The salon pays a portion of the loan payment and we pay a portion since we refinanced a previous home equity line of credit into the new equity loan.  If the business shut down, we would be responsible for making the entire payment. So does this mean that we are considered at risk? Checking the box under her K-1 section significantly increased our federal return, but not the state (MA) return.  Am I interpreting the definition of "at risk" correctly?