The shareholder/employee cannot deduct the expenses individually as it appears from your question that you are aware. The S-Corp would have to initiate a reimbursement policy for an accountable plan and make sure it becomes part of the corporate minutes. Legal advice for the wording is suggested.
Not making the new proposed policy part of the corporate minutes and being approved by the President/Secretary/Board can have it eventually be attacked by the IRS and disallowed.
To make it as simple as possible, have the employee submit expense reports, along with copies of the documentation substantiating the expenses, to the Company for reimbursement and have that report approved by someone, if possible, other than the officer/employee submitting the report. If that is not possible, have the company policy be one which requires documentation before expense reimbursement will be allowed. That should prove defensible should the IRS or a state agency attempt to disallow the deductions.
@n1njah
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