McGugan took in two loan spells at Hillsborough during the 2014/15 campaign, and his form while with the club has apparently convinced manager Stuart Gray that he would be a useful addition.
McGugan made 29 appearances for the Owls over the course of a steady season for the second tier side, scoring three times, and Gray now wants to secure his future.
The attacking midfielder is one of the standout players in the Championship on his day and securing him early would be a sign of Wednesday's ambition.
The Yorkshire outfit are tipped to be among the favourites for promotion next season and have money to spend on new recruits following the takeover of Dejphon Chansiri.
It means that a busy summer is expected at Hillsborough, and McGugan may be the first new player to join up.
It is still unknown whether Watford would be open to the deal but, considering that they have just been promoted to the Premier League, it seems unlikely that they will keep McGugan on their books having happily loaned him out while competing at a level below that to which they are now heading.