I’m a software engineer in California collecting unemployment insurance. In addition to looking for a full-time job, I’m also trying to start a software consulting business. I’m buying business cards, building a website and portfolio of my work, meeting with prospective clients, etc. I haven’t gotten any consulting clients yet but I’m trying hard.
I have two related questions: first: does trying to start a consulting business disqualify me from receiving unemployment benefits, even if I haven’t earned any money (yet!) from my consulting work?
Second: if I’m not successful in getting paid consulting clients by the end of the year, can I deduct expenses I incurred starting up my consulting business as losses on Schedule C? Or will that raise too many eyebrows given that I collected unemployment benefits for most of the year?
My unemployment benefits are larger than the tax benefit of Schedule C losses, so if I have to choose I won’t deduct my Schedule C losses. But I’d prefer not to have to choose! 
It might be okay, and it might not.
In order to collect UI Benefits, you have to be available, able, and willing to work. That is the gist of the requirements.
However, if you live in an area that is considered to have no to little job availability, then you might qualify to receive benefits while giving consulting work a shot. Look to the rules and regulations of Job Service for Unemployment Benefits.
You can also technically call Consulting Work for others in your field a part of your job search too.. however, that is a close call for some of the department workers who will have to determine your status.. sometimes, they ain’t too bright.. ya know what I mean??
The bottom line is that if you collect benefits illegally.. there could be fined and penalties, as well if they determine that you collected monies without grounds to collect them.. you can go to jail! Oh yea.. I have seen that happen.