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To the extent the payment to the builder would be considered as payment towards changes to accomodate official space, this loss will be considered as business loss and can be deducted on sch c.
However, the important/crucial issue here for you would be to prove that the payments was related to improvements for business use.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.