Update! In re-reading my post, it struck me that italics and bold are fine on
purchased books but not on my test book which is side-loaded. I googled "kobo sideload italic" and found (on Mobileread forums of course!) that this is a bug of the lasted Kobo firmware update! So, I've spent my entire day puzzling over a non-existent problem.

How to test my epubs then? Just to confirm, is it considered acceptable to use <em>tags for an italicized word in the middle of the text?