I know that on Sch Page 2 you can add a line to include the business interest in additional to the K-1 ordinary business income line. Does the interest get used to decrease the basis in the S-Copr stock?
In other words, do I manually go into stock basis and record a decrease to basis?
It does not reduce basis, or rather it both increases and decreases basis - a wash. In order to pay the deductible interest (which reduces basis), the taxpayer paid it personally (a contribution which increases basis).
Assuming it financed an operating nonpassive business, add it to the related K-1 input screen as a nonpassive loss in the 'Separately Stated Income and Deductions' section and also add that amount in the 'Basis Limitation' section as an other item that increases stock basis.
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