I've also read that PVC should not be used for compressed air so I chose to put it after the regulator to limit any potential damage. This also allows the air to expand and cool lowering its temperature and making the desiccant work better. You could also place the dryer behind the tank or some other large object to minimize potential damage or place it in a section of 4" stove pipe. I have the regulator set to 60PSI (my compressor tops out at 125 PSI) and I use another regulator at the gun. As you suggested, the air enters the bottom of the dryer and exits out the top. I also installed small screens at the input and output to keep the desiccant out of the air lines.
